How Important Is Medical Innovation To The U.S. Economy?

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

By Rob Wright

Last week I received a phone call from Paul Foy, business writer for the Associated Press (AP). Foy was conducting research for an article and was looking for insight on the size of the pharmaceutical industry. My initial response was to ask for clarification on what he meant by size. He informed me he was looking for a dollar figure for sales. This prompted another clarification question from me. Are we talking about sales of prescription-only medications, or are you looking for a dollar amount which includes vaccines, combination drug devices, and over-the-counter products (OTC), which could include ointments, sunscreens, cough drops, and so on. The list is fairly extensive when you start thinking about it. But do sales figures of such products really measure the economic impact of an industry? Let’s take a closer look.

Living Longer, Better, Wealthier?

From 1900 – 2010, the United States has witnessed a 96% decrease in deaths, and a 62% increase in life expectancy. By the year 2040, average U.S. life expectancy is anticipated at being 85 years of age, while the rest of the world is estimated to be at 72 years of age. According to Frank Lichtenberg, Ph.D., new therapies are the greatest contributor to increased life expectancy. A business professor at Columbia University, Lichtenberg assessed the contribution of pharmaceutical R&D to longevity and the economic growth which results. You may find some of his insights startling. First, the pharmaceutical industry is the most R&D-intensive sector of the economy, not technology. Second, the rate of return on investment in pharmaceutical R&D is 18%. Third, using newer drugs actually decreases overall healthcare costs, with much of the savings being due to reduced hospital stays and physician office visits. For $1 spent on innovative medicines, healthcare spending is reduced by approximately $7.20. So let me ask you — what type of financial impact does living longer have economically?

According to University of Chicago economists Kevin Murphy, Ph.D., and Robert Topel, Ph.D., who calculated cumulative gains in life expectancy after 1900 to be worth over $1.2 million to the representative American in the year 2000. Further, in the 30 years between 1970 to the year 2000, life expectancy gains added approximately $3.2 trillion per year to the national wealth of the United States. But medical innovation contributes more than just living longer and accumulation of wealth.

Medical Innovation Economics 101

Over the past 50 years, medical innovation has been the source of more than 50% of all economic growth in the United States. It is estimated that there are more than 650,000 jobs in the U.S. biopharmaceutical sector, with each of these jobs supporting an additional five jobs in other sectors. In a report by Battelle, a nonprofit R&D organization, the overall economic impact of the biopharmaceutical sector on the U.S. economy in 2009 (as measured by output) was estimated to be more than $917 billion on an annual basis. Further, the biopharmaceutical sector generated nearly $85 billion in state, local, and federal tax revenues for 2009. The annual average personal income of a biopharmaceutical worker in 2009 was nearly twice the average across all private sector industries ($118,690 vs. $64,278). When you compare export numbers among industries, you may be surprised to learn that in 2010 the U.S. biopharmaceutical industry exported $46.7 billion, which is more than automobiles ($38.4 billion), plastics and rubber products ($25.9 billion), communications equipment ($27 billion), and computers ($12.5 billion). With all of these positive U.S. economic attributes, why then does it seem everyone is intent on killing the golden goose that medical innovation represents? The Obama administration is pushing for policy changes to Medicare Part D, which if enacted will most likely result in decreased pharmaceutical R&D spending, as well as the loss of possibly 250,000 high wage jobs. So Paul, to answer your question, the pharmaceutical industry is BIG. How important is medical innovation to the U.S. economy – VERY!